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June 12, 2013

How Growth Can Ruin Your Firm—and How to Prevent It

FA Insight reveals the results of their latest study, and what it means for an advisor's future

“Only 14% of advisors have a plan for the future structure of their firm.”

The stark comment from Eliza De Pardo kicked of an afternoon workshop on human capital management at TDAI’s 2013 Elite Advisor Summit in Palm Beach, Fla., on Wednesday afternoon.

“Why is growth important, and why do advisors want to grow their business?” De Pardo rhetorically asked. “They have some pretty personal reasons for doing so.”

The study found that motivation for growth industrywide is high at the moment, with advisors citing the desire to fully serve client needs as the top reason.

“We found it surprising that it came before ‘increasing the returns to shareholders,’” she noted. “Cost savings and efficiency gains were then mentioned. The ability to attract and retain top talent was next, and solutions for succession planning rounded out the answers.”

The actual advantages of solid growth are widespread, and often center on the aforementioned human capital advantages, De Pardo added. They include:

Providing a career path for individuals at the firm

Reducing dependency on key individuals

Firms can justify charging a premium for their services versus their competitors

However, unmanaged growth can be detrimental for many of the same reasons.

“It can actually make providing a career path more difficult, and it can make relying on a key individual more pronounced,” she argued. “Why? You’re adding more complexity to the firm, and you have to now think about how each employee fits in.”

Management often can’t keep up with the pace of growth, and neither can technology. Because it often leads to more work and more stress for employees, it gets harder to attract and retain top talent.

“It can result in decreased profitability, productivity and ultimately lower client satisfaction,” she said.

A common challenge to transitioning from “a practice to a business” is that the firm outgrows the skill level of the founder.

“When revenue hits between $500,000 and $600,000, it’s time to bring in a junior associate. When revenue hits between $1.5 million and $3.5 million, it is time to bring in a dedicated management team to run the firm.”

De Pardo concluded by noting that firms that are successful at achieving “breakthrough growth have a documented plan for organizational design, and everything they do, from hiring to how an employee fits into the firm to succession planning, all comport to the plan."